If you believe you are in danger of defaulting on your home mortgage the first thing you should do is call your mortgage lender or bank. This is an extremely important first step if you are finding it tougher and tougher to make your mortgage payment each month. Do not wait until you have missed one or more payments before you pick up the phone. It might not be easy to admit you are going through a financing rough patch, but being up front, honest, and working directly with your lender is crucial to minimizing further hardship, and hopefully avoiding a default on your mortgage.
When approaching this difficult situation you should understand that you are not alone. Many homeowners are behind on their mortgage payments or have had their homes foreclosed. Many more would not be able to continue to make their current payments if they suffered even a short term an interruption in income, or had to take on a large unexpected expense such as medical costs due to illness or injury.
When you are ready to talk to your lender be sure to call the company that currently services your loan (the one you make your payments to), which is not necessarily the same bank, broker, or lender you originally obtained the loan through. There should be a customer service number on your monthly statement and on the company’s website.
Before you speak with your loan servicer consider what the ideal outcome would be for you. Is your ultimate goal to stay in your home? Would it be a relief to sell the property and avoid foreclosure even if you didn’t gain any money from the sale? Could you afford your mortgage payment if it was slightly lower? Did you miss a few payments but will be able to make them from now on?
If you hope to stay in your home your best bet is to refinance or restructure your loan so that it is affordable. Refinancing is likely a viable option if you are still current on your mortgage payments, have an adequate credit score and history, have some equity in your home (though this is not always necessary), and would be able to afford the payments based on the terms of loans currently available. If you are able to obtain a lower interest rate it could substantially lower your monthly payment, possibly bringing it within reach. Similarly you may be able to extend the term of your loan (paying it back over a longer period of time), lowering your monthly payment. For example if you currently have 17 years left on your loan refinancing into a 30 year loan could help lower your mortgage payments.
In cases where homeowners do not qualify for a refinance loan and can no longer afford their mortgage payments, a loan restructuring may be possible. This is an arrangement worked out between the mortgage holder and the home owner to change the terms of the loan so that the repayment schedule is more manageable. What they can offer will vary by mortgage holder according to their individual policies, but in many cases it is in their best interest to avoid the cost of foreclosure. Some of the possible restructuring scenarios may include spreading out the balance of any missed payments over the next few months, a short term or permanent interest rate reduction, lowering the amount of the outstanding principal to closer to the property’s current value, or extending the loan term.
When even a significantly lower monthly payment would still be out of reach the best option may be to sell the property. If the home is worth less than the outstanding mortgage a short sale, where the lender agrees to allow the homeowner to sell the home for less than the mortgage balance, may be possible. In most cases the lender takes all the proceeds of the sale, forgives the remaining balance of the loan, and the home owner walks away from the property avoiding foreclosure. A short sale may still negatively impact the homeowner’s credit history, but most likely not to the extent that a default would.
By communicating openly with your mortgage lender, and working together towards a mutually beneficial resolution, hopefully you can avoid a mortgage default. Before agreeing to any refinance, restructuring, or short sale arrangement be sure that you understand all of the new terms you will be bound by and are comfortable.